What happened
Shares of Silvergate Capital (SI 0.31%) popped as much as 82% this week, according to data from S&P Global Market Intelligence. The bank and financial infrastructure provider for the cryptocurrency market was roiled by the FTX scandal in late 2022 but has since seen a resurgence, with rising crypto prices and a recent announcement that Blackrock made an investment in its stock. As of 3:41 p.m. ET on Thursday, Feb. 2, shares of Silvergate Capital are up 53.5% this week.
So what
Silvergate Capital runs a bank that services cryptocurrency companies. Infamously, it was connected to the now-disgraced FTX exchange, which defrauded customers out of billions in deposits.
All the details are still unknown, but senators have continued to press Silvergate executives on their involvement with the fraudulent cryptocurrency exchange, which investors have taken as a sign of trouble for the company. Shares of Silvergate have collapsed, down almost 80% in the last six months, even after the recent share price pop.
So what is causing the rally this week? Two news stories come to mind. First, the obvious one is the sharp rise in cryptocurrency prices over the past few weeks. For example, the price of Bitcoin has risen 44% so far in 2023.
Silvergate doesn't have direct exposure to cryptocurrency prices, but investors are likely taking rising prices as a sign that the company could get on better footing with its depository partners, giving it more breathing room as it tries to navigate the fallout from the FTX turmoil.
Second is the announcement that Blackrock -- the world's largest asset manager -- had increased its stake in Silvergate to 7.2%. While a minuscule position compared to the size of Blackrock, investors bid up Silvergate stock by 10% the day of the announcement.
It is also possible that all we are experiencing this week with Silvergate is a classic short squeeze. An estimated 50% or more of Silvergate's shares outstanding are currently sold short by short sellers, which can increase volatility on the stock if they are all forced to buy back the loaned-out shares at the same time. This may have occurred this week, driving shares of Silvergate sharply higher.
CRYPTO: BTC
Key Data Points
Now what
Even with the stock rising a healthy amount, Silvergate does not look to be out of the woods just yet. Its deposits slipped rapidly in the last few months of 2022, creating the potential for a "run on the bank" situation. Management had to lay off 40% of its workforce and just suspended payments on its preferred stock.
Both these decisions indicate Silvergate is still in a precarious financial position, which is why investors should avoid buying shares today.
